There are a few kinds of mortgages you can choose from and it may seem overwhelming at first, but once you understand the different options it will make your choice a lot easier. Different mortgage options will cater to your specific needs. Here, we will explore how a private mortgage works compared to a collateral mortgage.
What Is A Private Mortgage?
If you are struggling to get pre-approved for a mortgage loan, going with a private mortgage may be your best option. You do not obtain a private mortgage through a bank, but rather a business that specializes in private mortgages, an individual or a family member. It is a shorter-term (one - three years) and you are only paying interest until your term ends and you can transfer to a bank. Once you transfer to a bank with a better credit score, you will start paying the mortgage yourself.
The interest rates are very high for private mortgages. You could be paying a 10%-18% interest charge over a three-year term, rather than the typical 3-5%.
Why Would I Go With A Private Mortgage?
A private mortgage is not for everyone. If you have a poor credit score, have filed for bankruptcy or do not have a reliable source of income and are struggling to get pre-approved through a traditional lender, a private mortgage may be your best option.
Because you have a poor credit score, most private lenders will require a higher down payment. Rather than paying the typical 5%, you may have to pay 10-15% because you are considered a high-risk borrower.
A private mortgage does not take as long to acquire as a traditional mortgage (can take up to 30 days or more). If you need a mortgage now, it may only take a few days, which could also be beneficial to people who are only looking to have a short-term mortgage.
Things To Consider As A Lender
If your family member needs help purchasing a house and you decide to let them borrow money and set up a private mortgage, there are things you need to consider:
- What is your relationship like? Will you remain close should any problems arise?
- Is the borrower considered high risk? Do they have a reliable source of income?
- Do you understand the property value and conditions involved with the home?
- Will the borrower/homeowner stay on top of maintenance and be able to afford any probable issues?
- Will you ask for a loan with lien (will give you right to property until their debt is paid)?
- Do you have time / can you organize the paperwork?
You will want to make sure everything is well documented incase there are any problems. Having everything written down on paper, especially if you have to refer back to something from a few years ago, will make the process much easier. Document things (and have the borrower sign) like:
- When the payments will be due – at the end of every month? Bi-weekly?
- How the payments will be made – sent automatically electronically?
- Can the borrower make extra payments without penalty?
- As a lender, can you charge fees if payments are late? Will you give them a grace period?
- Will the payments be reported to credit bureaus?
Borrowing From A Friend Or Family Member
If you are borrowing from someone you personally know instead of a business, they may charge you a lower interest rate you may not find anywhere else. You will also be able to negotiate on payment terms and what schedule will work best for you. Making steady payments will positively increase your credit score and your chances of being able to transfer your mortgage to a traditional lender once the term has ended will be much greater.
A private mortgage is a better option for people who need a quick mortgage, or who have poor credit and cannot be pre-approved through a bank. Lenders can be a family member or friend or a business who specializes in helping people with bad credit. If you are going to be a lender for your family member, you still need to set rules down and make sure everything is documented properly so you can fall back on something if need be.
What Is Collateral Mortgage And How Does It Differ From Other Mortgages?
How a collateral mortgage works is similar to a home equity line of credit where you are given a borrowed amount of money with a fixed rate and set term. It is a good option for people who may need to borrow more money in the future.
With other mortgages, you will have to refinance after a certain time but you can transfer the mortgage to different lenders or discharge from then. With a collateral mortgage, you do not have to refinance or pay legal fees but, you cannot transfer your mortgage and if you switch lenders you will have to pay legal fees. It will also cost you to switch to another lender and re-register your mortgage with your property.
How Much Can You Borrow With A Collateral Mortgage?
With other mortgage loans, you can borrow up to 80% of the purchase price. With a collateral mortgage you can borrow up to 125% of the purchase price.
For example, if you purchase a $450,000 house and pay a 20% down payment of $90,000, you can borrow the remaining 80% of $360,000 with a regular mortgage. With a collateral mortgage, you would be borrowing $562,500.
Because you are borrowing more money with a collateral mortgage, it may be a bit more difficult for you to open another line of credit or get another loan.
How Do I Know Which Mortgage Is Right For Me?
Every case is different. Always ask around and do your research before even putting a payment down on your home. Different mortgages will cater to certain people. If you think you will need to borrow more money, than a collateral mortgage may be for you. If you would prefer paying off your mortgage quickly and making payments however often as you would like, an open mortgage may be the better option. You also have to take into consideration your income and budget.
Disclaimer: prices subject to change
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What Is A Mortgage?
When you purchase a house, you are making monthly payments to pay it off. You borrow money from a bank in order to pay for the mortgage and are paying the bank back. Learn more about mortgage
The down payment is the amount you will pay upfront to obtain a mortgage. Learn more about down payment
An interest rate is charged with your mortgage since you are borrowing money from them. The smaller the amount you borrow, the lower your interest charge will be.
Mortgage Term or Amortization Period
The amortization period is the total length of time over which you plan to pay off your mortgage.